Briefing Note - Lease Premium Relief, January 2013

Limitation of deduction where a long lease is reclassified as a short lease HMRC issued an informal consultation in May 2012 on reform of the lease premium tax legislation for property income. The area identified for consideration is CTA09 s243, the rules for determining the effective duration of a lease. The equivalent for income tax purposes is ITTOIA s303. The implications are that if a long lease can be identified as a short lease as a result of these rules, the tenant can get an income tax deduction for the relevant portion of any lease premium payment.

HMRC has identified difficulties with the operation of these rules where there is a dispute between tenant and landlord, and it also perceives there to be some abuse in this area where the landlord's property profits are tax exempt (such as for pension funds, government bodies and NHS Trusts) with the inference that tenants are asking for long leases to be drawn up so as to be classified as short leases under these rules.

Rule 1 in both CTA09 s243 and ITTOIA s303 permits a lease to be for a duration ending on the expected date of termination where:

this is before the end of the lease term;

it is unlikely the lease term will extend beyond the expected termination date and;

the premium for entering into the lease is not substantially greater than...